First of all, for many people, their home is their most significant asset. So, I understand that one may want to use the home to tap into the equity to do a number of things. It is your money and you are entitled to use it for any lawful purpose.
I talk to many people who are content to use all of their wealth during their lifetime and leave little for their heirs or charity. There are some people who would live in abstract poverty in order to leave something to family. There are still others who want to leave something for family, but still, do not want to live in poverty. My view is that this is a highly personal decision, so I make no judgment.
Having said all of this, regardless of one’s personal preference, I think it is a good idea to learn the facts of reverse mortgages before taking the plunge. Let’s look at some facts:
1. The qualifications, set out in the 2013 Congressional Act, the “Reverse Mortgage Stabilization Act (“RMSA” or the “Act”),”
a. One must be at least 62 years of age
b. Can draw against the equity in the home
c. Without repaying the loan
d. So long as the borrower stays in the house.
2. The borrower can take the money up front or as a line of credit and does not have to make payments or pay interest until later. The interest is deferred until the house is sold or the borrower moves out – often into assisted living or a nursing home. When interest is deferred, it is added to the end of the loan, thus increasing the interest that will be deferred.
3. The amount of equity the borrower can take is less than he or she can get with a traditional loan.
The older the borrower is, the more equity he or she can get.
4. The older the borrower is, the more equity he or she can get.
The good: Certainly the elderly often need more funds and this is a way to get it.
The bad: Closing costs are significant – more than traditional loans – often exceeding 10% of the amount of the loan.
The ugly: Up front costs, often called “Loan Origination Fees,” can reach 2% of the loan, meaning on a $350,000.00 loan, the Loan Origination fee could be $7,000.00.
The uglier: Even though a loan originator can make such significant fees, this person will often see a “soft target” in a panicked senior, and will try to sell annuities or other financial products. Sometimes an originator will try to convince a borrower to obtain these funds to buy long-term care insurance at an exorbitant cost.
The sneaky: Interestingly enough, the Act requires a prospective buyer to meet with a mortgage counselor for advice, though the quality, ethics, and objectivity of the counselor cannot be certain. One of the best places to go to find a legitimate counselor is www.napfa.org, but still there is a fee for this service.
My view is that if you have little funding and just want to live out your life as a jet-setter, think hard. If you just want to impress someone with how much money it appears you have, think hard. There are other options like downsizing your living quarters and your lifestyle. Look for community or church senior groups. These may offer you a sense of community and belonging that will add to the value of life.
Douglas S. Holden © 2018. ALL RIGHTS RESERVED